Return of capital tier
Last updated
Quick Answer
The return of capital tier repays limited partners the capital they have contributed, before any profit is shared.1,2
What it is
This is the first tier in a conventional waterfall. What it returns is defined by the agreement and is not always simply drawn capital: it may include capital contributed for fees and expenses as well as for investments, and whether it does is a negotiated point with a direct effect on when the later tiers are reached.1,2
Operational context
What good looks like
Why It Matters
What counts as returnable capital — investments only, or contributions for fees and expenses too — is settled in a definition, and it decides how long limited partners wait before any later tier is reached.1
Related Questions
What is the 80 20 rule in private equity?
"80/20" refers to the residual tier of a distribution waterfall, where profits remaining after the earlier tiers are split 80% to limited partners and 20% to the general partner as carried interest.
What is the distribution waterfall mechanism?
A distribution waterfall is the ordered sequence of tiers that determines how a fund's proceeds are split between limited partners and the general partner.
Frequently Asked Questions
What is Return of capital tier in venture capital?
This is the first tier in a conventional waterfall. What it returns is defined by the agreement and is not always simply drawn capital: it may include capital contributed for fees and expenses as well as for investments, and whether it does is a negotiated point with a direct effect on when the...
Why is Return of capital tier important for startups?
Understanding Return of capital tier is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.ilpa-model-lpa-wof-ts — ILPA Model LPA Term Sheet — Whole-of-Fund Waterfall Version (July 2020)ILPA Model LPA Term Sheet — Whole-of-Fund Waterfall Version (July 2020)ILPA(The return of capital tier repays limited partners the capital they have contributed, before any profit is shared.)primary · T1 · waterfall-models · structure
- 2.duanemorris-clawbacks — Private Equity Funds: Clawbacks and Investor GivebacksPrivate Equity Funds: Clawbacks and Investor GivebacksDuane Morris LLP(The return of capital tier repays limited partners the capital they have contributed, before any profit is shared.)secondary · T2 · waterfall-models · structure
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